Professional Company – Advantages and Disadvantages

What is a professional company (PC)?

A PC is a company owned and operated by one or more members of the same industry (eg, doctors, lawyers, accountants, dentists). The services provided by the company are generally limited to the practice of the industry.

Professional firms are now allowed in the Canadian provinces and regions. In each province / region, professional regulators usually decide whether or not their members can be included. For example, doctoral regulators in all provinces and territories allow doctors to incorporate

What is the difference with a common company?

Company of a specialized company and public

for example:

  • Only members of the same industry may be shareholders of professional firms in many (but not all) provinces
  • Senior Officers and Directors of professional corporations are also generally required to be shareholders of the corporation.
  • Investigation and Regulatory Powers of Professional Companies Generally Regulated by Regulatory Authorities
  • Professional firms do not protect professionals from professional negligence on personal responsibility.

Due to these differences, some of the benefits usually associated with the company may have limited applications to professional firms.

Reduced federal and provincial corporate tax rates apply to the earning of the first $ 400,000 earned

Professional income from professional firms. Some provinces apply up to $ 500,000 in revenue to reduced tax rates. Provincial limits vary by province. In 2010, federal and provincial tax revenues were limited by small businesses to between 11 and 19 per cent. As a result of this lower tax rate, the professional services income paid by the combined company shareholder tax rate is slightly lower than if you were earning directly.

Potential Tax Delays

Perhaps the most significant advantage of using a PC is the ability to defer taxation. Profits earned as a dividend income are distributed to you

Because the firm-level income is taxed at a level higher than the personal income of the firm, the income earned by the firm is taxed at two levels – once at the firm level and then at the shareholder level Low tax rates, where income is taxed at the company (at a lower tax rate) and is not distributed to shareholders (ie you), there is a chance of deferred tax. When a dividend is paid to you, the dividend is terminated when you pay the dividend.

Let us explain. If you earn $ 500,000 per year as a sole proprietor, and only $ 200,000 in pre-tax income for personal expenses, you will be left with $ 300,000 and will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with $ 159,000 in investment

On the other hand, if you incorporate this approach, then $ 300,000 will remain in the company and be taxed at the small business tax rate.

Personal Income ($) ($ 200,000)

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Outstanding funds $ 300,000 $ 300,000

Flexible Employee Benefit

As an employee of a professional company, the Company may, as an employee of a professional company, have the right to use the company's capital, You may obtain certain types of employee benefits, otherwise you are a sole proprietor or a partner. For example, a company can create an individual pension plan for you (discussed later) or a retirement compensation arrangement (RCA). These retirement savings vehicles can also provide you with possible creditor protection benefits.

Capital gains tax exemption

The Canadian tax rules allow tax exemption for shares in small commercial companies that are eligible to be sold for up to $ 750,000 in capital gains. This $ 750,000 capital exemption is also applicable to shares in a professional company, subject to certain conditions.

Compensation Flexibility

You can choose a professional company that accepts a combination of professional company salaries and dividends.

Limited Business Responsibilities

Professional firms generally do not protect you from liability for professional negligence.

You can divide your income by paying dividends to adult family members, Of the shareholders. This strategy may not apply to professional firms located in the provinces where the ownership of shares is restricted to members of a particular industry.

According to the Canadian Inland Revenue Department (CRA) ruling, professionals who conduct business through professional partners can Professional firms, and access to multiple small business deductions (SBDs).

Revenue of $ 400,000 in SBD income is subject to preferential tax rates (SBD is higher in some provinces). Historically, SBDs must be shared among all company partners.

Personal Retirement Plan

The Personal Retirement Plan (IPP) is a defined benefit pension scheme that professional firms can set up for professionals. IPP provides more than 40 years of age a better annual contribution than the RSP limit. The assets in IPP are not protected by creditors; however, they may be subject to lock-up provisions during retirement.

Costs and Complexity

The cost of establishing and maintaining a PC is usually higher than that of a self-employed person

. In addition, professional firms will need more costs to file corporate tax returns, prepare T4 documents for salaries and T5 documents for dividends.

Employers' Health Tax and EI Premium

Companies in several provinces must pay provincial health taxes once the company's wages have exceeded a certain threshold.

For damages

As mentioned above, a professional company will not protect you from personal infringement

Who should use a professional company?

Computers can provide potential tax breaks and deferred tax benefits. If you do not need all your income, this may appeal to you. If you wish to save your retirement by other means (such as a pension plan or retirement compensation arrangement) or you wish to limit your personal liability for commercial liability, a professional firm may also file an application with you

before you consider cash collateral Strategy to convert all non-deductible personal debts into taxable commercial debt. Find out more More

If you have questions about any of the issues discussed in this article, please contact your Consultant